Chapter 5 – Implementing a Local Currency Program

The single biggest hurdle that any group will face in launching their own currency is to get a sufficiently large enough group of individuals and businesses to accept the currency as “real money” and therefore viable for conducting commerce in goods and services.

Part of the problem here is that most people have unconscious biases that money can only be the national currency. Yet it is highly likely that most have already made use of an alternative currency, but did not realize it because it was not labeled “money.”

For example, the largest alternative currency in the world goes by the name of “airline miles” under frequent-flyer programs,[i] where participants can spend their miles or points on goods and services, just as they might with a fiat currency. Most people do not think of such a program as an alternative currency — but it is. Coupons of various types likewise can be used in whole or part as a replacement for conventional money, but most people would not call them money.

Other alternative currencies like Bitcoin and Ether[ii] often refer to their currencies as “tokens.” And communities often give their local currency a name like Berkshares[iii] in Massachusetts or names that echo the national currency such as the Brixton Pound[iv] in the U.K. or the Toronto Dollar[v] in Canada.

So, choosing a label may help to overcome a bias against such a new currency. Getting a local government to accept the currency can go a long way to creating acceptance by the rest of the community. And getting a credible community institution to stand behind the currency can help ease residents over that conceptual hump.

Once the acceptance hurdle is overcome, the sky’s the limit. Communities are then only constrained by the ways they might inject that currency into their local economy.

The key is that the money created by these other parties is not considered fiat money — the “coin of the realm” as it were. Nonetheless, some governments do accept alternative currencies for payment of fees and taxes and therefore blur the lines between fiat currencies and alternative currencies. And getting a local government to do so may make all the difference in its acceptance in the community.

The Bristol Pound, was the largest local currency previously in circulation in the United Kingdom, is a case in point, where the local city government had accepted that currency in payment of fees and taxes. Local governments are starved for resources as well, and more and more of them are accepting or would consider accepting an alternative currency as a valid source of revenue.

To the extent that they do, that helps to legitimize that currency as real money. However, it does not stop there. Local governments can get key infrastructure projects paid for that might otherwise go unfunded (see below), providing them with even greater incentive to accept the currency. And the community benefits by getting needed public projects paid for without the necessity of taxation.

In a nutshell, communities need to develop an alternate monetary paradigm that can be built at the local level. It should be able to be done with little friction and largely off the radar screen of the banking industry. It should not require any changes to law or systemic practice. As pointed out above, history has shown that communities that issue their own currency can rapidly change their local economy for the better.

What if the Federal Government Accepted Complementary Currencies?

The grand prize would be if the federal government were to accept alternative currencies for payment of fees and taxes. That would compel all state and local governments to do so as well.

Such a step would be transformative. Surprisingly, the prospects of that happening in the United States are much closer than one might imagine.

That’s because of action by the Internal Revenue Service Advisory Council[vi] (IRSAC), a long-standing IRS advisory group created by Congress to analyze tax issues and make recommendations to the IRS. In 2018, the IRSAC was asked for suggestions on how to focus guidance to taxpayers that use or invest in virtual currencies (their term for complementary currencies) and the practitioners who serve these taxpayers. The IRSAC was also asked for input on compliance and enforcement relating to collection actions on virtual currencies.

In their year-end Public Report[vii] the IRSAC noted that, “Use of virtual currency as a payment method has grown in popularity and has emerged as an alternative to using fiat currencies (i.e., government-issued currency).” The report went on to say that “Virtual currency poses tax compliance risks [arising] from non willful conduct by a taxpayer (e.g., lack of understanding regarding the taxability of virtual currency transactions, how to calculate basis of gain/loss from virtual currency transactions, how to characterize income, third-party reporting responsibilities, etc.). Compliance risks can also arise from willful conduct by a taxpayer (e.g., using virtual currency to evade taxes).”

One of the key questions addressed by the IRSAC concerned the issue of the IRS accepting virtual currencies for payment of taxes. The IRSAC concluded that the IRS is already authorized to do so, and should do so!

A November 2018 Forbes article Let Taxes Be Paid With Virtual Currencies, IRS Panel Urges[viii] provides a succinct report of the IRSAC recommendation to the IRS that it accept virtual currencies as payment of federal taxes. Note the following in particular:

“However, the IRSAC notes several states are considering accepting virtual currencies as payment for taxes and the IRS could do the same. Section 6311(a) provides that the IRS may receive “any commercially acceptable means [of payment of tax] that the Secretary deems appropriate to the extent and under the conditions provided in regulations prescribed by the Secretary.”

Further, in section 8 of the Recommendations on page 78, the IRSAC recommends that IRS:

“8. Accept payment of tax liabilities with virtual currency. If the regulations under section 6311 were amended to provide for the payment of tax through virtual currency, the IRS could leverage the information and experience obtained from voluntary payments of virtual currency to strengthen enforced collections.”

The impact of this on the world of complementary currencies at the local level would be incalculable. It would instantly create credibility that such a currency is real money (the big question in many people’s minds).

It will also solve a HUGE problem for anyone receiving a payment in a virtual currency that IRS would consider taxable. Currently the IRS considers such payments as though they were made in dollars, but requires the taxpayer to pay the taxes due the IRS in dollars, not the virtual currency. So, if anyone were to pay employees, in whole or part in a complementary currency, the employer and the employee would have to pay any taxes due the IRS in dollars. Obviously very convenient for the IRS but VERY inconvenient for the tax payers. If all parties concerned could pay the tax in the virtual currency, that is a game changer.

Five Ways to Inject a New Currency into a Local Economy

The design of such a system needs to be done in recognition that the issuers of a new currency can use at least four different methods of injecting that money into local economies, and that they may use any or all methods.

Note: There are also other systems often considered alternative currencies, that in reality do not entail a currency at all but rather some other units like time tracked in hours or systems that facilitate barter (goods for goods exchanges). Such systems have a place in such a new monetary paradigm but are not likely as scalable as the below options. Those other systems are not contemplated here.

Let’s now look at the actual means by which a currency can be introduced into the community.

First of all, keep in mind that the issuers of an alternative currency can create that currency out of thin air, just like the banks do, only they do not have to follow a prescribed set of rules (like banking regulations) to do so. And in many cases the issuer will be some form of community economic development organization, often a non-profit, with the good of the community as their primary concern and not the wealth enhancement of shareholders. Here’s what they can do.

1 Sell the new currency for another currency.

This is usually done in exchange for fiat currency, but it can be for other currencies such as Bitcoin. By far this is the most common method used by the thousands of alternative currency providers around the world. They often tie the issuance of a local currency to a campaign to promote local businesses, called “buy local” campaigns. 

The problem with this method is that it is usually tied to fiat currencies and therefore does not get us fully away from the existing bank-debt created money paradigm. It also tends to limit the amount of new money being injected into a local economy. Nonetheless, it does help to establish a baseline value to the new currency, which then helps with these other methods. If this is all that a community does, it will likely have limited success and may not persist. The following methods greatly increase the probability of the system succeeding and persisting.

2. Spend the money into existence.

This is the option that many wish governments would do – just issue money directly to pay for government programs like infrastructure projects, social programs, and health and education benefits. In the case of a complementary currency issuer, they can elect to just issue money directly into the community to pay for both physical things (like infrastructure), organizational things (like schools, police, fire and other community benefit entities) and programs for people (programs like universal basic income).[ix]

More than any other option, this direct spending approach injects new money into the local economy, especially to pay for things that otherwise might require tax dollars to fund. Taxes remove money from circulation and thus this approach not only puts money into circulation but reduces the amount of money being removed for a double impact with each unit of the currency so issued. On top of it all, the commonwealth of the community, in the form of parks, bridges, roads, community buildings and the like, is expanded.

3. Grant the currency.

This final way may well be the most impactful, especially as a means of funding things like non-profit and/or local government programs.

Many such countries desperately need infrastructure investments. Likewise, the people need money and thus a universal basic income grant program may be prioritized in order to get money directly into the hands of the people. The benefits of directly providing grants of money to individuals and families can be seen with such programs as GiveDirectly,[x] although these programs are based on fiat currencies and thus are constrained in how much they can give.

Issuers of an alternative currency have no such limits. In subsequent Chapters I will explore various grant programs.

4. Lend the new currency to businesses and individuals.

In essence the issuer would function much like a fiat currency denominated bank, only in this case they would lend the alternative currency as loans or lines of credit. In most countries, lending an alternative currency could be done without any regulatory oversight. And like conventional banks, these complementary currency banks would have no limit to the amount of loans they could issue. In addition, they would likely have more flexibility to determine how much, if any, interest to charge and how much collateral to require to provide the credit to the borrower.

Likewise, they could elect to lend to very early stage companies (startups), something one almost never sees with conventional commercial banks. And a key attribute of such a lending program is that it will inject “new” money into the economy (in contrast to option 1) and usually when society needs it, i.e., when the economy is down. Granted, such money ultimately gets paid back and therefore is removed from the economy, but those lenders have options such as rolling over the original loan to a new loan and doing so on a perpetual basis, thus keeping the money in the community float, or returning the interest paid on the credit to the community at large rather than to shareholders. However, the next two options will expand the program even more and the money will remain in circulation.

5. Invest the new currency into businesses.

Here the issuer functions as a venture capital entity, investing money with local small businesses without an obligation on the part of those businesses to pay back that money as they would with a loan. Thus the money remains forever in circulation. And like money created for loans, the issuer has no cap on the amount of complementary currency it can issue as investments in companies. Most communities struggle to raise venture capital funds as they can only turn to the wealthy to put up money.

Not so with this complementary currency venture capital program. Effectively they have an unlimited capital pool to draw from. Such an investment program could be coupled with any number of entrepreneurship development programs that can include guidance and mentoring to enhance the survivability of the investees. If the issuer is a non-profit community development organization, that issuer would effectively become the mechanism by which the community owns some or all of a group of local small businesses.

This option could provide the needed capital to buy out retiring businesses owners and keep those businesses in the community, as described in this article.[xi] One of the benefits of this option is that such money is sticky, i.e., it remains in the community for the benefit of the community and does not have to be paid back as loans do.

Grants and Gifts as Used In This Book

Note* I will use the term “grant” throughout this book to mean just “giving” the money away (a “gift”), the assumption being that doing so does not trigger a taxable event with the IRS. Unfortunately, that is not always the case with the IRS.

Depending on the giving action, in some cases the IRS will consider the money received by the beneficiary as taxable and in other cases, the same amount of money given to the same party will likely not trigger a taxable event.

And grants and gifts are not the same thing, as USC describes on this site.[xii] “A gift is typically provided with no expectation of direct benefit or deliverables in return, often motivated by philanthropic or personal reasons. On the other hand, a grant is awarded based on specific criteria and is typically intended to fund a project or initiative with defined goals and outcomes…”

This is further complicated by the exempt purpose of the non-profit giving the money. According to this site,[xiii] a 501(c)(3) non-profit “…can gift money to individuals, provided the individual falls under the primary demographic the nonprofit assists and the donation falls within your organization’s mission as declared to the IRS…”

This site[xiv] expands on that mission consistency concept “…The specific purpose of a charitable nonprofit corporation may be specified in its articles of incorporation. It may also be restated or further limited in the corporation’s bylaws or other public communications or filings…” 

However, the IRS further states that a 501(c)(3) nonprofit must also serve a charitable class for such donations. “A charitable class is a group of individuals that may properly receive assistance from a charitable organization. A charitable class must be either large enough that the potential beneficiaries cannot be individually identified, or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance…”

Even then, there are limits to the amount or type of donations that can be provided to maintain a tax-exempt status. According to this IRS page, a gift is “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return…” gift exemptions “…The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

1. Gifts that are not more than the annual exclusion for the calendar year.* 
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made…”

* Currently, 2025, that annual exclusion is $19,000 per donor/per recipient. Example: a husband and wife can each give $19,000 to the same recipient.

One further nuance that can impact just about any non-profit concerns their volunteer workers. Many non-profits like to provide them with some form of a gift to say thank you for your help. Even there it can get sticky, as explored in this article.[xv]

Let me hasten to point out that I am not an attorney or tax expert, but I can read and use common sense to interpret certain rules. So, here is a case in point that demonstrates the problem under current law.

Let us say that we want to provide college students with a scholarship grant. Under current law, not all of that grant can be considered non-taxable, as described here. That is pretty straight forward, if we call the money given a “scholarship grant.”

However, what if we just give money to those students in the form of a gift? Sounds the same, but not to the IRS. If those students all fall under an allowable “charitable class,” and student support fits the mission of the non-profit, and the amount given to them conforms to annual limits, it may not be taxable to the student.

Therefore, I caution the issuers of a complementary currency to carefully choose how they label a program and its consistency with their IRS approved mission and all the rules about grants and gifts. That is, until we are successful in getting a change in tax regulations that will make it a moot point. That change is introduced in Chapter 21 and elsewhere.

Setting up your own system

When it comes to setting up a local currency system, communities are largely free in most countries to design a system that best fits their needs. For example, a developing country that has a limited amount of currency in circulation may predominantly favor the fourth option of directly spending the currency into existence.

See the details in the next Chapter on my recommendations for establishing your own regional complementary currency system.

[i] https://en.wikipedia.org/wiki/Frequent-flyer_program

[ii] https://www.forbes.com/advisor/investing/cryptocurrency/what-is-ethereum-ether/

[iii] https://en.wikipedia.org/wiki/BerkShares

[iv] https://brixtonpound.org/

[v] https://en.wikipedia.org/wiki/Toronto_dollar

[vi] https://www.irs.gov/tax-professionals/internal-revenue-service-advisory-council-irsac

[vii] https://www.irs.gov/pub/irs-prior/p5316–2018.pdf

[viii] https://www.forbes.com/sites/tedknutson/2018/11/15/let-taxes-be-paid-with-virtual-currencies-irs-panel-urges/

[ix] https://en.wikipedia.org/wiki/Universal_basic_income

[x] https://en.wikipedia.org/wiki/GiveDirectly

[xi] https://www.linkedin.com/pulse/retiring-business-owners-flood-market-michael-sauvante

[xii] https://dcg.usc.edu/resources/defining-a-gift-vs-a-grant/#:~:text=A%20gift%20is%20typically%20provided,with%20defined%20goals%20and%20outcomes

[xiii] https://thecharitycfo.com/501c3-donation-rules-the-ultimate-guide/

[xiv] https://nonprofitlawblog.com/grants-to-individuals-and-businesses-part-one/

[xv] https://www.software4nonprofits.com/blog/can-a-nonprofit-give-gifts-to-volunteers/